Regulation of shadow banking

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8 US The tri-party repo market is extremely important in the US. A key element is the uncollateralised intraday credit provided by the market’s clearing banks. This proved a source of weakness during the financial crisis. The three main problems were: • overreliance by market participants on intraday credit from the clearing banks; • risk management practices that were vulnerable to procyclical pressures; • the lack of a transparent process for the orderly liquidation of a defaulted broker-dealer’s collateral. To eliminate this shortcoming and ensure the stability of the tri-party repo market, the Fed created a Tri- Party Repo Infrastructure Reform Task Force. In May 2010, the task force published a white paper whose recommendations for solving the problem were to be implemented by the end of 2011. This objective was not achieved. 39) The task force eventually issued a final report in February 2012 and the Fed stepped up its supervision of market participants. The Fed’s objective is that market participants should dispense with intraday credit from the clearing banks altogether. Although some progress has now been made – market participants are increasingly managing to coordinate their trades in such a way as to significantly reduce the length of intraday borrowing – this target has not yet been reached. The usage of intraday credit at present has declined to around 30% of the volume before the crisis and is to be reduced to 10% by the end of 2014. To this end, J.P. Morgan Chase and the Bank of New York Mellon (BNYM), the two clearing banks, will continue to make major changes to their clearing processes. The Fed also expects dealers and investors to make changes to their business processes so that the objective can be met. Another concern of the task force is to increase the transparency of the tri-party repo market. For this purpose, it publishes a monthly report detailing the size of the market, the composition of collateral and margining practices. These reports are compiled in close cooperation with the clearing banks, the Fixed Income Clearing Corporation (FICC) and the lenders and borrowers involved. Assessment Both for banks and for other market participants, securities lending and repo transactions are an important means of securing liquidity. Their importance will grow further as a result of recent regulation such as the new capital requirements and new rules for derivatives. This will further boost the demand for highly liquid, high-quality assets needed, in particular, to satisfy collateralisation requirements (CCP clearing, OTC derivative transactions). At the same time, however, the available volume of assets recognised as liquid by regulators and the market will tend to decline. Before further measures can be taken, better information is needed about the scale and structure of the repo and securities lending markets. It will be important to avoid gathering data indiscriminately and instead concentrate in both the breadth and depth of collection on data that will yield information about systemic risk. If sufficient transparency can be created in this way, the next steps towards regulation can then be tackled. Given the differences between legal systems, implementing the FSB’s policy recommendations is likely to prove difficult, especially those concerning 39) www.newyorkfed.org/banking/tpr_infr_reform.html 32 Regulation of shadow banking
ankenverband rehypothecation and reuse. As yet, it has evidently not been possible to reach a consensus on how the terms “rehypothecation” and “reuse” should be used. The same goes for the key associated concept of “client assets”. Care will also need to be taken when placing restrictions on the circumstances under which assets may be rehypothecated. Not only is there a lack of clarity about what instruments should be covered, but such restrictions could also have an adverse effect on market liquidity. It is unclear at present whether regulation will consist of regulatory measures alone or will also entail substantial changes to civil law. The rationale behind the planned introduction of minimum haircuts for repos between regulated market participants and shadow banking entities is that it will mitigate the procyclicality of repo markets. At least in the view of market participants, however, no hard evidence has yet been produced that haircuts have a procyclical effect. Since this measure would also impair the liquidity and availability of securities used in repos, the possible impact should be examined in advance. The FSB’s QIS 1 and QIS 2 were designed to do just this and should therefore contribute to the development of appropriate regulation. The proposed minimum haircuts should be set at a level that ensures they constitute a fall-back regime. Otherwise, all market participants will be more or less forced to use the minimum haircuts instead of evaluating the risks involved themselves. In terms of optimising risk management, this would be a clear step backwards. Regulation of shadow banking 33
Page 1: Regulation of shadow banking A guid
Page 4 and 5: Foreword This impression is complet
Page 6 and 7: 6 Regulation of shadow banking
Page 8 and 9: 2 State of play in regulation of sh
Page 10 and 11: 2 increase in demand for highly liq
Page 12 and 13: 2 paper on shadow banking that stro
Page 14 and 15: 3 It also remains to be seen whethe
Page 16 and 17: 4 Standards Board (FASB) in the US.
Page 18 and 19: 4 While the efforts to adopt reform
Page 20 and 21: 5 EU In the EU, the UCITS Directive
Page 22 and 23: 5 have proved controversial on both
Page 24 and 25: 6 These economic functions are the
Page 26 and 27: 6 This would mean that non-bank SIF
Page 28 and 29: 7 Disclosure requirements Enhanced
Page 30 and 31: 8 Workstream V: Securities lending
Page 34 and 35: 9 Annex Table 1 The FSB approach No
Page 36 and 37: ankenverband Publishing details Pub

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